British Land NAV way ahead of forecasts after strong letting performance

British Land reported a stronger year-end net asset value than the market was expecting but despite its confident talk of generating better returns, investors got the wobbles over its talk of "uncertainty" and the reining back of speculative developments.

The FTSE 100 property developer recorded an EPRA NAV almost flat at 915p, with net assets at £9.5bn at its 31 March year end, down from £9.6bn over the year. The consensus estimate for NAV was 853p.

With £1.5bn of disposals were made over the year, including the sale of its 50% interest in the Leadenhall Building for a 26%-above-book-value £575m which is expected to complete post year end in May, the value of the portfolio weakened 1.4%, eased by a 1.6% gain in the second half.

The negative property valuation movement in the year meant at the reported level IFRS profit before tax fell 85% from £1.3bn to £195m.

But the leasing performance was strong, with 1.7m square feet of lettings and renewals across the portfolio, 8.0% ahead of estimated rental value, adding £22m of rent in the year.

Despite the huge structural changes in the retail sector, the group's retail lettings were made at 10.8% ahead of ERV and offices 1.4% ahead.

This helped lift underlying profit 7.4% to £390m and underlying earnings per share 10.9% to 37.8p.

Using some of the £363m cash generated, a final quarterly dividend of 7.3p was declared, up 3% on the same period last year and lifting the full year payout 3% to 29.2p.

For the 2017/18 financial year, the board has proposed increasing this by 3% again for a total dividend of 30.08p per share, with 7.52p in the first quarter.

Chief executive Chris Grigg said it was "a good set of results today despite an uncertain environment" and that the increase in valuations in the second half is "better than many expected six months ago".

Looking forward he added: "We expect to be operating in an uncertain environment for some time; in this context we will benefit from the resilience of our business, the quality of our portfolio and the strength of our finances.

"We also look forward with cautious optimism as we believe that we can generate incremental returns by allocating capital to development opportunities we have created, whilst keeping risk at an appropriate level and maintaining flexibility to respond to changes in our markets."

He did highlight that the uncertainty in property markets meant businesses were taking longer to commit to taking space and being more thorough in their assessments.

British Land’s full year underlying profits, essentially rental income minus expenses, rose 7% in 2016/17 to £390m. However, Net Asset Value (NAV) fell 0.4% to £9.5bn, or 915p per share.

Shares in the company fell 1.8% following the announcement on Wednesday.

Analyst Nicholas Hyett at Hargreaves Lansdown said the headline numbers were "actually pretty good, valuations haven’t tumbled and rental income has remained robust, even improved" and that the continued steady growth of the dividend "will be what matters most for many investors".

"However, British Land is clearly uncomfortable about the future. Speculative developments have been reined right back and leverage is falling as the group sells some high profile assets, including a 50% stake in the Cheesegrater. That’s sensible given the group’s disproportionate exposure to the prestige London office space most likely to be hit if Brexit results in a mass exodus of bankers, lawyers and the like. However, it suggests the group feels there could be stormy weather ahead.”

Broker Numis however saw not only a strong set of results and said the magnitude of the NAV beat was greater than it expected "and we believe will be taken as a sign of confidence by the market, in particular when combined with the solid operational performance", notably strong retail lettings and LFL income growth up 2.9%.

The shares trade on 26% discount to FY17 NAV and yield 4.3%, with Numis increasingly positive on the broader sector.